Finding the Best Way to Reform Social Security

Five years ago, Rep. Bill Thomas (R-Calif.) introduced legislation to allow American workers to invest half of their Social Security taxes in their personal accounts that would grow tax-free until retirement. Although it didn’t pass, the legislation provided Congress with a different approach to Social Security reform, which President Bush may want to consider.

Government analysts predict that by 2025, the number of Americans age 65 and older will grow by 75 percent, while there will only be a 13 percent increase in the number of workers paying taxes to finance the Social Security system. If nothing is done, Rep, Rob Portman (R-Ohio) paints a grim picture for baby boomers and their children who will depend on Social Security when they retire.

“Unless changes are made now, policymakers would have only three choices: raise taxes, cut benefits or borrow the money from elsewhere,” Portman said. “In my view, those options are unacceptable. There have to be a better way.

“Many experts believe that modernizing the Social Security system can be accomplished in a way that protects retirees’ benefits while allowing younger workers to save more of their Social Security money themselves. The key is to get a higher rate of return on the payroll tax dollars we all pay into Social Security.”

Bush is convinced he has the answer: reform the Social Security system through personal retirement accounts similar to IRAs or 401(k)s. He proposes allowing workers to invest 2 percentage points out of the 12.4 percent total Social Security payroll taxes in personal accounts.

While the higher return on investment in Bush’s 2 percent personal accounts will help, it won’t be enough to make Social Security solvent permanently, said Andrew Biggs, Social Security analyst with the Cato Institute’s Project on Social Security Privatization.

Biggs pointed out that one solution to fill the gap is to raise the retirement age, trim benefits, reduce cost-of-living adjustments or means-test benefits to the better-off. A better plan is to save and invest more money now to reduce the need for benefit cuts or other unpleasant changes in the future, he said.

With Bush bent on reforming Social Security through personal retirement accounts, Biggs said Thomas’ recognition of the need for increased investment could bear fruit.

“Workers investing half of their payroll taxes in personal accounts could see substantially higher benefits than under the current system for the simple reason that market investments reap much higher returns than Social Security,” Biggs explained. “The current system’s return to today’s workers will be well under 2 percent annually, while even the safest investment in the world-inflation-indexed Treasury bonds-yields double that. Investing in broad-based stock funds or corporate bonds could raise returns higher.”

If Thomas, the new chairman of the House Ways and Means Committee, sticks with his plan to let workers invest half of their Social Security taxes in personal taxes, Bush will have a powerful ally in Congress, according to Biggs.

While Thomas and other members of Congress focus their attention on crafting legislation to reform Social Security, the full House made certain that nothing happens to the Social Security and Medicare trust funds.

In mid-February, the House, by a 407 to 2 vote, approved H.R. 2, “The Social Security and Medicare Lock-Box Act of 2001.” H.R. 2 protects Social Security and Medicare surpluses from being used for spending on other government programs or for tax cuts. The House forwarded the bill, which was introduced by Rep. Wally Herger (R-Calif.) and has 70 co-sponsors, to the Senate budget and government affairs committees for consideration.

The partisan political environment in Washington could hinder efforts in Congress to enact needed reforms to save Social Security for future generations, Portman warned. He proposes the establishment of a new Bipartisan Commission on Social Security Reform.

Portman said the commission would be charged with taking Social Security reform out of the political process and developing an expert, unified proposal that could be presented to Congress. Similar to the Internal Revenue Service reform committee he co-chaired in 1996-97, Portman said the Social Security commission would consist of 17 members appointed by the House and Senate majority and minority leadership and the president. The commissioners would come from a variety of backgrounds, representing all those who have a stake in the Social Security system, he said.

Bush and members of Congress have the same goals in mind. They want to put Social Security on sound financial footing and provide American workers with a role in personal retirement planning without government spending. How these goals are accomplished will depend on the type of reform legislation Congress eventually enacts.

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